The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Centogene N.V. (NASDAQ:CNTG) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Centogene's Net Debt?
As you can see below, Centogene had €4.30m of debt at March 2021, down from €4.62m a year prior. But it also has €45.2m in cash to offset that, meaning it has €40.9m net cash.
How Healthy Is Centogene's Balance Sheet?
According to the last reported balance sheet, Centogene had liabilities of €56.3m due within 12 months, and liabilities of €26.1m due beyond 12 months. On the other hand, it had cash of €45.2m and €31.8m worth of receivables due within a year. So it has liabilities totalling €5.34m more than its cash and near-term receivables, combined.
Of course, Centogene has a market capitalization of €186.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Centogene boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Centogene's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Centogene reported revenue of €181m, which is a gain of 261%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Centogene?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Centogene lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €5.1m and booked a €18m accounting loss. However, it has net cash of €40.9m, so it has a bit of time before it will need more capital. Importantly, Centogene's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Centogene has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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